Being Careful about Sunk Costs

I find that when a person understands a concept deeply she can start to take shortcuts in the language used to express that concept. This is usually okay if everyone in the room has a depth of understanding to handle the shortcut. However, when I am teaching economic thinking concepts, usually I'm interacting with people who are not deeply versed in the concepts. 

My mental/verbal shortcut with respect to sunk costs thinking is "ignore sunk costs." But that phrase really is a shortcut for "don't consider sunk costs when making a decision going forward." Put yourself in the shoes of someone who has never thought about sunk costs before. "Ignore sunk costs" probably seems pretty ridiculous. Somehow, we're supposed to completely forget the blood, sweat and tears put into a project? We're supposed to forget that the past hasn't happened?

I think "ignore sunk costs" is sloppy because we don't want people to forget what they've spent their time on. We want to learn and be more productive by analyzing our actions. Secondly, I've NEVER been able to "not consider sunk costs when making a decision going forward" without explicitly paying attention to exactly what is a sunk cost, articulating it to myself and decision makers, and being mindful of sunk costs while analyzing a situation. This is exactly the opposite of ignoring the sunk costs.

Lately, when I've been teaching concepts around sunk costs, I've been trying to be more careful and realistic with respect to the application of sunk costs. The anecdotal result has been an improvement over past because the conversations and questions have reflect practical and real situations instead of just silent head bobbing.

What examples or real life applications have you used to teach or think about sunk costs? I'm always looking for new ways to express these ideas.

Comments

[Ann]

Here's a link about sunk costs that I just came across: http://lifehacker.com/5562758/recognize-sunken-costs-to-cut-stress-and-financial-losses

[staffaction]

I tend to use these two examples:

1) You go out with the fam to a nice restaurant for dinner. You start feeling really sick for some reason. Do you eat the $40 steak? But you have to pay for it now that you've ordered, it right?! No, you'll feel much better if you just sip your water then go home even if you have to pay for something you don't eat.

2) You have a vacation to Williamsburg, VA planned and paid for. At the last minute something else comes up that must take precedence. Do you go through wi8th the vacation because you've paid for it? No, you attend to whatever it was (you fill in the blank that came up).

3) An example from the firm - There is a single printer in the office and it is pretty lame, doesn't scan pdf, is slow etc. Do I use that printer since we already own it etc. or do I use the "community" printer upstairs even though it will cost 9 cents a copy? I use the printer/scanner upstairs. In the end it's a better use of my time/resources to do that rather than waste a half hour or more trying to figure out the printer that is paid for.

Maybe those examples help?

[David McGinnis]

The example I use most is garage sales.

It's really interesting to see what prices people put on CRAP. They usually justify the asking price based on the original price. Needless to say this serves as an example of what NOT to do. When pricing items in a garage sale, you have to ask "what might somebody be willing to pay for this... today?" You can sell items you got for free for a hundred bucks and items you payed 20 dollars for for 50 cents. It doesn't matter what it cost, it matters what it's worth. I think garage sales are pretty easy to wrap your head around.